Regulating Banks

Andrew Whitworth

Description

Banks have been at the heart of economic activity for centuries, but since the 2008 financial crisis scrutiny of their activities and regulation of their actions has become the focus of fervent academic, policy and political activity. This focus takes for granted the existence and nature of banks.

In Regulating Banks, Andrew Whitworth looks one stage deeper to question what a bank really is, and what the implications of that are. He argues that the institutional form of a bank represents the political compromise of a specific time and place - and can therefore change. This has implications for financial stability. Far from creating stability, he argues, the regulatory impulse of policy-makers inevitably leads to greater financial instability.

Whitworth examines the postwar period of UK banking to show how regulation influences the nature of banks as much as their behaviour. Regulation, by changing the nature of what is regulated, encourages banks and other actors over time to alter their behaviour, which leads to future boom and bust cycles. These cycles then require further regulation to rein in the disruption their new pattern of behaviour inevitably instigates.

Regulating Banks reveals the cyclical nature of banking regulation, the inherent mismatch between political impulses and market reactions, and the price banks, banking and society pay for such instability.

1. Introduction: what is a bank?
2. The financial-regulatory cycle
3. Other ways of banking: the UK experience, 1945–70
4. Competition and Credit Control (C&CC) and the secondary banking crisis
5. The Banking Act 1979 and Johnson Matthey Bankers
6. Returning to the question: how the financial-regulatory cycle creates financial instability
7. The City revolution, 1987 Banking Act and two international bank failures
8. New Labour reforms and the 2008 financial crisis
9: The post-crisis response
10: Conclusion: banking regimes

Sujets

• Political Economy
• Banking
• Economie gestion
• Bank
• Economics
• Business
• Finance
• Banks

Informations

• Publié par: Agenda Publishing
• Date de parution: 10 décembre 2021
• Nombre de lectures: 0
• EAN13: 9781788214063
• Langue: English
• Poids de l'ouvrage: 4 Mo

Extrait

Finance Matters
Series Editors: Kathryn Lavelle, Case Western Reserve University, Cleveland, Ohio and Timothy J. Sinclair, University of Warwick
This series of books provides advanced introductions to the processes, relationships and institutions that make up the global financial system. Suitable for upper-level undergraduate and taught graduate courses in financial economics and the political economy of finance and banking, the series explores all aspects of the workings of the financial markets within the context of the broader global economy.
Published
Banking on the State: The Political Economy of Public Savings Banks
Mark K. Cassell
British Business Banking: The Failure of Finance Provision for SMEs
Michael Lloyd
The European Central Bank
Michael Heine and Hansjörg Herr
Quantitative Easing: The Great Central Bank Experiment
Jonathan Ashworth
Regulating Banks: The Politics of Instability
Andrew Whitworth

© Andrew Whitworth 2022
This book is copyright under the Berne Convention.
No reproduction without permission.
All rights reserved.
First published in 2022 by Agenda Publishing
Agenda Publishing Limited
The Core
Bath Lane
Newcastle Helix
Newcastle upon Tyne
NE4 5TF
www.agendapub.com
ISBN 978-1-78821-404-9
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Typeset by JS Typesetting Ltd, Porthcawl, Mid Glamorgan
Printed and bound in the UK by TJ Books
CONTENTS
Acknowledgements
1 . Introduction: what is a bank?
2 . The financial-regulatory cycle
3 . Other ways of banking: the UK experience, 1945–70
4 . Competition and Credit Control and the secondary banking crisis
5 . The Banking Act 1979 and Johnson Matthey Bankers
6 . Returning to the question: how the financial-regulatory cycle creates financial instability
7 . The City revolution, 1987 Banking Act and two international bank failures
8 . New Labour reforms and the 2008 financial crisis
9 . The post-crisis response
10 . Conclusion: banking regimes
Notes
References
Index
ACKNOWLEDGEMENTS
The first impulse for this book came in the aftermath of the financial and euro-zone crises. I wanted to understand why regulation had failed to provide financial stability – or had even contributed to instability. This question sparked my research in political economy.
Since then, the UK’s withdrawal from the European Union and the world’s economic response to Covid-19 have only highlighted the relevance of the political causes of financial and regulatory change. For much of this time, I was privileged to work in the Bank of England on a variety of issues with extremely intelligent, motivated and supportive colleagues. My own understanding has benefited immensely from this experience and, I hope, some of that improvement has fed through into this book. It is a pleasure to acknowledge this open and collaborative environment. Nonetheless, any errors are, of course, my own.
The individuals who have helped me during the writing of this book are too numerous to list, but I would like to give particular thanks to Louise Eggett, Nicolò Fraccaroli, Fabio Hirschhorn, Harpal Hungin, Erik Jones, Teddy Kahn, Mike Plummer, Jonathan Story, Filippo Taddei, Matthias Matthijs and Rhiannon Sowerbutts. I would also like to thank members of the Bank of England’s Financial Stability History Workshop and participants of the Bank of England/KCL conference on “History and Policy-Making” for stimulating discussion on a number of the themes and episodes of this book.
I would also like to thank Alison Howson at Agenda Publishing for encouraging me to publish this book and for her support throughout this process.
Andrew Whitworth
1
INTRODUCTION: WHAT IS A BANK?
Banks do not really exist. They are constructed. Banks are always and every-where determined, defined, and constituted by the legal permissions they are given by whichever the public authority may be: Royal Charter, Act of Congress or Parliament, or regulatory rules of thumb, preference or requirements. Differently to a physical good or type of service which does exist outside of its regulation (for example a haircut or legal advice), banking is not an activity or object on which regulation or rules can be imposed but rather one which is created by these regulations, rules and requirements. Change the rules, change the activity, change the bank.
These rule-changes – and therefore the changes to what banks do and so what banks are – happen all the time. And for various reasons. Banks, like any profit-maximizing institution, will always try to innovate beyond their explicit permissions so that they can increase their returns. By definition these new activities are outside the original scope of the banking regulation. Public authorities have a choice: to try to fill this regulatory gap or to leave it. So regulators often change rules to bring these new activities that banks undertake into their scope.
Sometimes banking regulation changes because political ideas change and so what society at large wants from its banking sector changes. Sometimes there is a greater focus on the safety of the sector, sometimes on its competitiveness, sometimes on its contribution to national production, and sometimes on the ease of access for consumers. There could be any number of political aims for the banking sector. When that changes, so do the rules imposed on banks and thus what banks can do: and what banks are.
But one thing that banking regulation does not seem able to provide is financial stability; even though this is frequently (perhaps always) stated as one of its core objectives. Despite frequent regulatory change, financial instability persists. This book argues that this is as a result of the regulatory nature of banking, of the fact that banking is constituted through regulation but operates in the market. Banking regulation is created for political reasons (in its broadest sense) but banks operate according to market principles – in other words the attempt to maximize profits within a structured market. The gap between political inputs and market outputs is where financial instability springs up.
This book argues that only political change to the ideas and objectives of banking regulation can fill this regulatory gap, not any amount of technical improvement in the content of banking regulation. As this book will argue, to achieve financial stability the objective of regulation needs to be to re-embed banking into society, and not just to smooth the functioning of banking markets or to minimize spillovers to the wider economy.
Changing what bank regulation is for , changes what a bank is : and offers the possibility of financial stability.
Why does bank regulation matter?
The real-world motivation for this book is the 2008 financial crisis and resulting regulatory treatment of banks. This is not an abstract discussion but cuts to the core of the health of the world’s financial system, economy, politics and society. Finance is unstable, regulation fails to tame it: why?
Today again, there is disruption in financial markets; regulators are unsure how to respond. This is nothing new: fintech and cryptoassets today, credit default swaps in the 1990s, and secondary banking in the 1970s all disrupted traditional banking and required regulators to think through their principles for the new market environment. The Covid-19 crisis is doing something similar for the regulatory distinction between banking and non-bank finance. Financial innovation has always caused regulatory dysfunction. The way regulators adapt to this dysfunction determines how financial innovation impacts wider society and the economy, ultimately its risks and rewards.
The financial crisis showed the world what happens when banking goes bad. The real economy is starved of funds, unemployment rises and public finances come under strain. This is because of the nature of the banking system and its interrelation with the real economy. Banks are peculiar. They are institutions permitted by states to undertake certain financial activities. Primarily they hold deposits and make loans. This allows capital to flow around an economy to be put to productive use. This is the essence of capitalism.
In return for this permission banks submit themselves to certain rules and fund state activities in certain ways. The rules, activities, and funding change over time and place, but a necessary constant is the stability of banking. As Hyman Minsky (2011) showed, finance is inherently volatile but the point of banking specifically has always been its stability. Encasing financial activity in a specific institutional form was designed to make it more dependable. It is this cloak of dependability which was rent by the crisis.
In fact, banking has become less stable over the past four decades (Barth, Caprio & Levine 2004), culminating in the financial crisis of 2008. Yet the number of bank laws and their global spread has also increased over the past 40 years (Barth, Caprio & Levine 2013). Clearly this has not led to improved bank stability. Why not? And why does bank regulation change so frequently and still not lead to stability? Under an evolutionary framework we might assume that bank regulation will keep changing until policy-makers stumble upon a stable banking framework through some combination of design, luck and trial-by-error (Veblen 1898).
There might be a systemic reason for why regulation is not able to stabilize banking. This would explain why significantly varied regulations all similarly fail to create a stable banking regime. There might, therefore, be something in the relationship between regulation and banking itself which precludes stability. In short, looking at the banking-regulation relationship as a system might yield insights. Instability is endogenous to the financial cycle (Minsky 2011), but bank regulation is about more than the mark